Polygon Labs, in partnership with crypto trading firm GSR, has officially launched Katana, a new Ethereum-based Layer 2 blockchain built specifically to tackle long-standing inefficiencies in decentralised finance (DeFi). With over $200 million in deposits even before its launch, Katana is setting out to reshape DeFi’s liquidity dynamics and economic models.

In contrast to general-purpose chains, Katana is a purpose-driven blockchain designed to prioritise select financial applications particularly lending, perpetual futures, and memecoins. It is also introducing a suite of innovative features such as VaultBridge, a mechanism to funnel idle crypto assets into low-risk yield strategies.

Fixing DeFi’s Liquidity Problem

At the heart of Katana’s mission is a fundamental critique of today’s fragmented DeFi landscape. Polygon Labs CEO Marc Boiron argues that digital assets have been “siloed” across dozens of chains and hundreds of decentralised applications, leading to shallow liquidity and inefficiencies. “Every chain is built the opposite of what you would want for deep liquidity,” Boiron told DL News. “You literally have 30 decentralised exchanges on a chain.”

Katana aims to solve this by consolidating financial activity into a smaller set of high-quality applications that benefit from deep, centralised liquidity. Its infrastructure is intentionally designed to funnel liquidity into chosen protocols rather than allowing unrestricted competition. That means Katana will favour certain decentralised exchanges and lending apps starting with a modified version of Sushi for trading and Morpho for lending.

This selective approach might sound anti-competitive, but Boiron argues it’s the only path to meaningful DeFi improvement. “There’s no point in Aave trying to come and deploy [on Katana],” he said. “It’s too much money flowing through to Morpho.”

VaultBridge: Yield Without Inflation

A central innovation of Katana is VaultBridge, a protocol that automates the deployment of idle crypto into safe, yield-generating opportunities. Crypto assets bridged from Ethereum to Katana won’t just sit idle instead, VaultBridge will automatically route them back to Ethereum to be deposited in conservative lending pools on Morpho. These pools are managed by Gauntlet and Stakehouse Financial, two established crypto risk management firms.

The resulting interest income will be channelled back into Katana’s core DeFi applications to enhance user yields without relying on unsustainable token inflation. This directly addresses one of DeFi’s biggest issues: the overreliance on high-yield farming backed by native tokens, which often leads to rapid devaluation and capital flight.

Importantly, Boiron emphasised that this is not a revival of Polygon’s controversial 2023 plan to use $1.3 billion in idle stablecoins from its Ethereum bridge in the same way. That proposal was scrapped after backlash from the community, who saw it as a risky gamble with user funds. “Nobody’s worried about it on Katana, because as long as users know and opt into it, it’s their risk to take,” Boiron said. “The yield is going to be more conservative than any option available on Katana.”

No Governance Token, No Illusions

Unlike most Layer 2 blockchains, Katana will not be governed by tokenholders. Boiron made it clear: Katana’s native token, KAT, will not have governance rights. “Governance tokens are disasters,” he stated, adding that decentralised governance often only appears smooth when it’s secretly centralised behind the scenes.

Instead, Katana will be managed by the Katana Foundation, a nonprofit organisation backed by Polygon, GSR, and crypto infrastructure provider Conduit. A nine-member committee will oversee protocol decisions, while a separate 13-member security council will have veto powers and the ability to respond in emergencies such as hacks.

While committee members haven’t been publicly named for security reasons, Boiron stressed that decision-making would be transparent and technically decentralised, though not reliant on “faked” token governance.

A Strategic Complement to Polygon POS

Despite being developed by the same team behind Polygon POS, Katana is not seen as a competitor. Instead, it serves as a complementary chain, focused entirely on DeFi, while POS continues to evolve towards stablecoins and real-world assets.

Boiron sees this as a strategic diversification. With a shared architecture, assets and users can flow smoothly between the two chains. For example, fintech platforms onboarding via POS can use Katana to offer interest-earning products on idle user stablecoins, improving their product offering without compromising on compliance or usability.

“All these institutions are going to keep onboarding to POS,” Boiron said. “And they’re going to say, why don’t I offer some savings product to my users? That’s what Katana allows for.”

The Bigger Picture: DeFi as a Curated Experience

Katana is a bet on a more curated DeFi future. In contrast to the current open-access model, where any developer can deploy a competing protocol, Katana chooses to favour certain apps to promote liquidity, optimise yields, and minimise risk. It aims to mature DeFi into a more structured, user-friendly ecosystem, while still offering decentralisation where it matters.

With over $200 million in deposits at launch, institutional backing, and a forward-thinking architecture, Katana could offer a glimpse into what the next phase of DeFi might look like less chaotic, more intentional, and still built on the open-source ethos of crypto.

Whether this model proves successful will depend on how users respond to a less permissionless, more controlled blockchain environment. But for now, Katana stands out as one of the most interesting and controversial new experiments in the ever-evolving world of decentralised finance.